In a 59-39 vote that took place just after 8:30 p.m., the Senate passed the Restoring American Financial Stability Act of 2010. Olympia Snowe, Susan Collins, Chuck Grassley, and Scott Brown all crossed the aisle to vote for it. Maria Cantwell voted against it. Arlen Specter and Robert Byrd did not vote. Next up? Conference committee. BUM-bum-bum.

Meanwhile, job figures took a serious wrong turn, wiping out many gains to date. And Paul Krugman warns that Japan-style stagnation may be in America's future.

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Harry Reid partnered with Barney Frank to get the final votes, reports Brady Dennis: "Leaders successfully courted GOP Sens. Olympia J. Snowe and Susan Collins, both of Maine, in part by including in the final bill provisions that each wanted. Sen. Charles E. Grassley (R-Iowa) also backed the bill. Equally critical was the last-minute push to win over Scott Brown (R), the Senate's newest member. Brown's vote was secured partly through the help of Frank, his Massachusetts colleague. In an interview, Frank said Brown called him Wednesday evening as Frank was working out on the elliptical machine in the House gym. Brown wanted assurances that Frank would fight in conference to preserve provisions in the House bill that protect large and solvent Massachusetts institutions, such as State Street and Fidelity, from "unnecessary intrusion" by government regulators. Over the next 24 hours, Frank sent Senate leaders two letters stating his position, and Brown indicated that "on that basis, he could vote for cloture," Frank said."

All eyes turn towards conference committee, reports Annie Lowrey. "The conference committee is comprised of senior members of the committees that worked on the bills. In this case, that means the House Financial Services Committee, the Senate Banking Committee and the Senate Agriculture Committee — expect to see Rep. Barney Frank (D-Mass.), Rep. Spencer Bachus (R-Ala.), Sen. Richard Shelby (R-Ala.) and Sen. Saxby Chambliss (R-Ga.) as well as Dodd, Lincoln and others. The committee will prepare a “conference report,” splitting the difference between the House and Senate bills; the House and Senate approve the report and then, once signed by President Barack Obama, the bill becomes law. Frank, the head of the House Financial Services Committee, says he expects that done by July 4."

Jobless claims are shooting up, reports Sarah Murray: "New claims for jobless benefits soared last week, a worrisome sign for the slowly recovering labor market. Separately, an index of leading economic indicators fell in April, pulled down by a sharp decline in building permits. The number of workers who filed new claims for unemployment insurance climbed by 25,000 to a seasonally adjusted 471,000 for the week ended May 15, the Labor Department said Thursday. 'We are left with the uncomfortable possibility that the trend in claims has not only stopped falling, but may be turning higher,' Ian Shepherdson, a High Frequency Economics Ltd. economist, said in a note to clients."

Krugman warns that the US could have a Japan-style lost decade: "This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here."

"So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing."

Table of Contents: Merkley-Levin won't get a vote (and other FinReg news); BP's attempts to limit oil damage may be backfiring (and other energy news); Google is trying to use blogs to undermine an antitrust investigation (and other economic news); and higher taxes for hedge fund managers may be forthcoming (and other domestic policy news).FinReg

The Merkley-Levin proprietary trading amendment, along with the Brownback auto dealer amendment, won't get a vote, reports Brady Dennis: "Late Thursday, a deal emerged that helped pave the way for the final vote on the financial overhaul -- which passed 59-39. Under the agreement, there would be no vote on Brownback's amendment, and hence no vote on the Merkley-Levin provision, either. But the Senate would plan to hold a procedural vote Monday to instruct members of the House-Senate conference to consider exempting auto dealers when hammering out the difference between the two bills. However, there would be no such suggestion on Levin-Merkley. The two Democrats marched to the Senate press gallery late Thursday to accuse Republicans of pulling the amendment at the expense of auto dealers to protect big banks."

"Levin said that if Republicans indeed withdrew Brownback's auto amendment in order to kill the proprietary trading provision, 'that would be an extraordinary, powerful statement about the power of Wall Street.' Added Merkley: 'This is not what the American public deserves. They deserve a vote on this issue . . . those who want to vote against it don't want to have a recorded vote against it.'"

Obama is planning on campaigning in financial reform in the midterms, reports Michael Shear: "The campaign to make that case began even before the Senate passed the bill Thursday night. In a Rose Garden statement, Obama sought to make the connection between the financial legislation and the lives of everyday Americans and businesses. 'Wall Street reform will bring greater security to folks on Main Street -- to families who are looking to buy their first car or their first home; to taxpayers, who shouldn't have to pay for somebody else's irresponsibility,' Obama said in a brief statement after the legislation cleared a key hurdle."

FinReg would protect regulatory inspector generals from presidential pressure, reports Ed O'Keefe: "The five -- at the Federal Reserve Board of Governors, the Commodity Futures Trading Commission, the National Credit Union Administration, the Securities and Exchange Commission, and the Pension Benefit Guaranty Corp. -- campaigned for the Senate amendment, arguing their work would be compromised by partisan politics and the election cycle if the president could hire and fire them. Congressional Republicans have said they are especially concerned for SEC Inspector General H. David Kotz, who is investigating the agency's decision to file fraud charges against Goldman Sachs at their request. The Senate's 75 to 21 vote to make the five IGs accountable to an agency's commissioners instead of just the agency chief puts it at odds with the House financial reform bill." The House bill elevates the five to presidential appointments.

Regulators should classify credit default swaps are a form of insurance, writes Floyd Norris: "Credit-default swaps are, in reality, insurance. The buyer of the insurance gets paid if the subject of the swap cannot meet its obligations. The seller of the swap gets a continuing payment from the buyer until the insurance expires. Sort of like an insurance premium, you might say. But the people who dreamed up credit-default swaps did not like the word insurance. It smacked of regulation and of reserves that insurance companies must set aside in case there were claims. So they called the new thing a swap. In the antiregulatory atmosphere of the times, they got away with it."

The SEC is investigating whether investors broke legal obligations on the May 6 crash, reports Edward Wyatt: "The enforcement division of the Securities and Exchange Commission is investigating whether market makers and brokerage firms fulfilled their legal obligations to provide liquidity in the markets by buying and selling stock during the sharp market drop of May 6, the chairwoman of the agency said Thursday. The S.E.C. is also looking into whether market makers and brokers executed investors’ trades correctly."

One tenth of American banks are "problem banks" according to the FDIC, reports Michael Crittenden: "A total of 775 banks, or one-tenth of all U.S. banks, were on the Federal Deposit Insurance Corp.'s list of 'problem' institutions in the first quarter, as bad loans in the commercial real-estate market weighed on bank balance sheets. Poor loan performance in other sectors also continued to hurt banks, with the total number of loans at least three months past due climbing for the 16th consecutive quarter, FDIC officials said in a briefing on Thursday. 'The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility,' FDIC Chairman Sheila Bair said."

Republicans are cowards for not unanimously filibustering FinReg, writes Peter Wallison: "Why was the GOP unable to stand united and filibuster the bill before it reached the Senate floor? For the least meritorious of reasons, it seems: unwillingness to go to the voters this November without having done 'something' to punish Wall Street and the banks. This is true even though Senate Republicans know perfectly well that government housing policies were the principal cause of the financial crisis and the bill does nothing to address this issue, and that the losses of Fannie Mae and Freddie Mac—whose chief sponsor over many years was the same Barney Frank—will cost the taxpayers far more than TARP. Republicans also know that the last time they ran off without thinking they saddled American corporations with the huge, unwarranted costs of the Sarbanes-Oxley Act." Guess Grassley, Collins, Brown, and Snowe will be getting some fun mail?

Big banks will lose from FinReg, writes Noam Scheiber: "And yet, perhaps unwittingly, the upshot of financial reform will have been to make it costlier to be a big bank relative to being a small or medium-sized bank—which is to say, it has effectively taxed bigness. That’s because the legislation imposes a handful of new mandates and regulations—like oversight by a soon-to-be-established consumer financial protection agency, as well as limits on fees for debit-card transactions—from which small and medium-sized banks are exempt."

"Other reforms—such as a bill Congress passed last year to limit hidden credit-card fees and make statements more transparent, and new restrictions on trading derivatives—would disproportionately dent profits at megabanks. These banks tend to have far bigger credit card operations, and are the only real derivatives brokers to speak of. The big banks typically complain that these efforts will drive them out of this or that line of business, or at least curtail their activity significantly. But in a world in which we worry about megabanks doing too much rather than too little, that’s not necessarily a bad thing. If only there were a bit more of it."

Cultural criticism interlude: Film Critic Hulk.

Energy

The EPA is ordering BP to use a cleaner dispersant to clean up the oil spill, report Campbell Robertson and Elisabeth Rosenthal: "Local and state officials here voiced desperation on Thursday as their fears became far more tangible, with oil from the BP spill showing up on shore as tar balls, sheens and gooey slicks. In Washington, the Environmental Protection Agency said it had told the oil company to immediately select a less toxic dispersant than the one it is now using to break up crude oil gushing from a ruined well in the Gulf of Mexico. Once the agency has signed off on a different product, it said, the company would then have 72 hours to start using it."

Oil has made it to the Louisiana coast, report Angel Gonzalez and Jeffrey Ball: "'We knew it was coming,' said PJ Hahn, Plaquemines Parish's Coastal Zone Manager. Mr. Hahn saw the crude first-hand on Wednesday in the sensitive Pass-a-Loutre Wildlife Management Area. 'It was just thick, gooey oil in pools all up against the marsh," he said. The marshes, which teem with wildlife, help keep erosion at bay, and if they're damaged by the crude, officials fear that even more of Louisiana's rapidly disappearing coastline would melt away into the Gulf. 'We haven't seen the worst of it,' said Billy Nungesser, president of Plaquemines Parish, the area where the Mississippi empties into the gulf and the bulk of the beached oil has been found."

The White House is negotiating new emissions reductions with the auto industry, reports Josh Mitchell: "The announcement would come almost a year to the day after the Obama administration said it would order auto makers to increase the fuel economy of automobiles sold in the U.S. to 35.5 miles per gallon by 2016, four years faster than current federal law requires.…The White House and industry representatives plan to announce that they will start work on ensuring that standards are in place for 2017 and beyond, said several industry officials, who declined to be named because an announcement hasn't been made."

Scientists are attacking the government response to the oil spill, reports Justin Gillis: "The scientists assert that the National Oceanic and Atmospheric Administration and other agencies have been slow to investigate the magnitude of the spill and the damage it is causing in the deep ocean. They are especially concerned about getting a better handle on problems that may be occurring from large plumes of oil droplets that appear to be spreading beneath the ocean surface. The scientists point out that in the month since the Deepwater Horizon oil rig exploded, the government has failed to make public a single test result on water from the deep ocean. And the scientists say the administration has been too reluctant to demand an accurate analysis of how many gallons of oil are flowing into the sea from the gushing oil well."

Government scientists resigned after trying to stop plans for arctic drilling, reports William Yardley: "A proposal to drill for oil in the Arctic Ocean as early as this summer received initial permits from the Minerals Management Service office in Alaska at the same time federal auditors were questioning the office about its environmental review process. The approvals also came after many of the agency’s most experienced scientists had left, frustrated that their concerns over environmental threats from drilling had been ignored."

Greens should be fighting for good climate outcomes, not ideal mechanisms, writes David Roberts: "The left is constantly mired in inscrutable technocratic debates over mechanisms -- cap-and-trade or carbon tax? auction or free allocation? Clean Air Act or not? -- when it's the goals of the legislation that ought to be at issue. How much carbon pollution do we want to reduce? What kind of power do we want to use, and how much? How many jobs do we want? These are questions with which the public can meaningfully engage."

Toyota is investing big in electric cars, reports Jim Motavalli: "Tesla Motors and Toyota Motor announced on Thursday that Tesla had bought the recently closed Nummi assembly plant in Fremont, Calif., where it intends to make its Model S luxury electric sedan and other future models. Also, Toyota said it had agreed to buy $50 million of Tesla common stock upon the completion of its planned initial public offering. The companies also said they intended to cooperate on the development of 'electric vehicles, parts and production system and engineering support.' Production of the Model S will begin in 2012 at Nummi, the plant that had been a joint venture of Toyota and General Motors. Tesla said production of the Model S would occupy only a small part of the factory."

Motorhead interlude: The Tesla Model S.

Economy

Google is battling an antitrust investigation by blogging about it, reports Thomas Catan: "Many of the technology-savvy people contacted by Federal Trade Commission staff investigating Google Inc.'s $750 million deal to buy mobile advertising company AdMob Inc. have written online about the conversations. Some of their blog posts discuss the kinds of questions the FTC is asking, the apparent attitudes of agency investigators and their level of familiarity with online advertising. 'There is no way the FTC knows enough to support a decision to block the deal,' wrote a blogger from Wertago, a mobile nightlife application. The post was entitled 'Ignorance and Hubris at the FTC.'"

"Though there is no written rule against disclosing the details of such investigations, FTC staffers typically tell potential witnesses that such inquiries are nonpublic.…Google and AdMob certainly hope the online chatter will help their deal get approved. Both Google and AdMob Chief Executive Omar Hamoui have encouraged some mobile-software companies to blog about their experiences with the FTC and say why they support the deal, according to people familiar with the matter. Google points to the blogs as evidence that those who best know the sector support the acquisition."

Officials in the US and Europe are considering intervening in currency markets to save the Euro, report Bob Davis, Brian Blackstone, and Dinny McMahon: "Officials in the U.S. and Europe concerned about the euro's decline are cautiously talking about a policy tool they haven't used in a decade: intervening in currency markets."

The economy is on the agenda for Clinton and Geithner's China trip, reports Mark Landler: "On the agenda: trying to balance the economic relationship between China and the United States, breaking down trade and investment barriers, and moving China toward a market-driven exchange rate. But despite rising political pressure at home, administration officials said the United States did not plan to make a public show of pressing Beijing to loosen its policy of pegging its currency to the dollar. And it does not expect China to take any action on the currency until at least next month, because Beijing is loath to appear to yield to outside pressure."

The head of the European Central Bank is facing increased criticism, report Jack Ewing and Steve Erlanger: "For the first time in a long life of technocratic excellence, the president of the European Central Bank, Jean-Claude Trichet, finds both his judgment and his credibility in question. The crisis of the euro and the panic of the markets have pushed Mr. Trichet, 67, who has run the bank since 2003, into bending the rules, compromising his principles and appearing to give way to political pressure from panicked national leaders. In doing so, he may have saved the euro but lost part of his reputation for probity. 'The E.C.B. lost its virginity,' said Marko Skreb, a former governor of the central bank in Croatia. 'The last couple of days have clearly indicated that we live in a new world.'”

Europe's real sorry case is Germany, writes Steve Pearlstein: "At one end is a powerful and highly efficient industrial export engine that generates a large trade surplus with the rest of the world, including most other countries in the eurozone. Instead of spending this new export wealth on a higher standard of living, however, parsimonious Germans prefer to save it, handing it over to thinly capitalized German banks that have proved equally efficient in destroying said wealth by investing it in risky securities issued, not coincidentally, by trading partners that need the capital to finance their trade deficits with Germany. To prevent the collapse of those banks, German taxpayers are dragooned into using what remains of their hard-earned savings either to bail out their hapless banks or their profligate trading partners."

Greece could use some privatization, writes Allan Meltzer: "Much of Greece's industry and commerce, including much of the tourist industry, is owned by the state. It should be sold with the proceeds used to reduce public debt. That would make the remainder of the debt more sustainable and transfer workers to the private sector where competitive pressures for lower wages and increased productivity would more closely align employment costs and reality. If the socialist government returned more of the economy to the private sector, Greece would have a better chance of economic recovery. Much of the Greek economy not owned by the state is "underground," in the so-called informal sector, where wages and incomes adjust quickly to the market. Greece also should offer an amnesty for unpaid back taxes to those who join the legal sector."

The Fed doesn't see a need to provide more help to Europe, report Michael Derby and Luca di Leo: "The Federal Reserve saw no new demand for a special lending program it set up to relieve pressures in short-term bank loan markets in Europe in the week ended Wednesday. It counted $9.205 billion loaned by the European Central Bank to euro-zone banks via a 'swap' program in which the Fed sends dollars to foreign central banks and they lend them to local firms in need of dollar funding. That amount was unchanged from the previous week. The Fed reopened this emergency dollar lending program as concerns about debt-laden euro-zone nations came to a head last week, unsettling short-term lending markets and sparking a move out of risky assets and a rally in the U.S. Treasury market. The introduction of the Fed program came in conjunction with the unveiling of a European Union and International Monetary Fund €750 billion, or $1 trillion, bailout package for euro-zone nations and as the ECB started buying bonds of some member states."

Geithner is meeting with British and German officials about the European crisis next week, reports Ian Talley: "U.S. Treasury Secretary Timothy Geithner will travel next week to the U.K. and Germany to meet with top economic officials and discuss ways to resolve the current economic crisis in Europe, the Treasury said Thursday. Mr. Geithner will first meet Wednesday with U.K. Chancellor of the Exchequer George Osborne in London, on his way back from the U.S.-China Strategic and Economic Dialogue. He will then fly to Frankfurt Wednesday evening to meet with European Central Bank President Jean-Claude Trichet. The following day, he will meet with German Finance Minister Wolfgang Schaeuble in Berlin before traveling back the Washington."

Crooning interlude: Antony sings "Hope There's Someone".

Domestic Policy

Democrats are looking to raise taxes on hedge fund managers, reports Martin Vaughan: "Tax rates on private-equity and hedge-fund manager pay would rise to roughly 35%, from their current levels of 15%, under legislation unveiled Thursday by House and Senate Democrats. The proposal from Senate Finance Committee Chairman Max Baucus (D., Mont.) and House Ways and Means Chairman Sander Levin (D., Mich.) represents a compromise between House lawmakers who wanted to tax all fund managers' pay the same as wages and numerous Senate Democrats who wanted to preserve lower taxes for at least some of that income. The fund manager tax increase would help pay for a broad package of legislation that extends jobless benefits and renews expired tax breaks."

Bipartisanship shouldn't end careers, writes Ron Wyden: "I still think I had a pretty good idea for health reform -- despite its rejection by significant Democratic and Republican leaders -- but so did Bob Bennett. I was on the Senate floor three years ago when Bob walked across the center aisle to tell me he was willing to work with me on health reform. I had been meeting with him and other Senate colleagues for many weeks to talk about the Healthy Americans Act and what I believed was a historic opportunity for Democrats and Republicans to work together on an important issue. Ideologically, Bob and I couldn't be more different. He's pro-life. I'm pro-choice. He voted for the Iraq war; I didn't. If Bob has ever seen a tax break he didn't like, I am unaware of it. But one thing Bob and I have in common is our fundamental belief that we were elected to do more than just get reelected, that once elections are over we have a duty to try to govern even if it means working with people with whom we don't always agree." Aww…

Reading scores are down in urban school districts, reports Stephanie Banchero: "Students in large U.S. cities are struggling to improve their reading ability, especially at middle-school levels, according to results from a national reading test released Thursday. Only Atlanta and Los Angeles, two of the 11 urban centers that took the reading exam, showed growth in eighth-grade reading from 2007 and 2009. They also were the only two to show growth since 2002. Four districts notched gains at the fourth-grade level since 2007, while five showed progress since 2002. The test scores are part of the urban National Assessment of Educational Progress, or NAEP. Known as the 'nation's report card,' the exam has been given in urban districts biennially."

Small businesses aren't benefiting from a provision in health care reform targeted at them, reports Ricardo Alonso-Zaldivar: "When the administration unveiled the small business tax credit earlier this week, officials touted its 'broad eligibility' for companies with fewer than 25 workers and average annual wages under $50,000 that provide health coverage. Hoffman's workers earn an average of $35,000 a year, which makes it all the more difficult to understand why his company didn't qualify. Lost in the fine print: The credit drops off sharply once a company gets above 10 workers and $25,000 average annual wages. It's an example of how the early provisions of the health care law can create winners and losers among groups lawmakers intended to help — people with health problems, families with young adult children and small businesses. Because of the law's complexity, not everyone in a broadly similar situation will benefit."

Massey Energy faced withering criticism in the Senate on mine safety, reports Kris Maher: "The testimony, particularly Mr. Blankenship's, incensed 92-year-old Sen. Robert Byrd (D., W.Va.)., who noted that there were 10 safety violations a day at Massey mines. 'This is a clear record of blatant disregard for the welfare and safety of Massey miners. Shame!' As for MSHA, Mr. Byrd told Mr. Main that the agency 'still has much to explain.' He pressed Mr. Main on why his agency waited until after the accident to launch an inspection blitz of 57 other mines that had a pattern of safety violations. The Senate Appropriations Committee, with oversight over spending on mine safety agencies, scheduled the hearing to discuss steps that need to be taken to make the nation's mines safer. Such steps include raising funding for MSHA and reducing the backlog of cases before the federal Mine Safety and Health Review Commission that rules on safety violations contested by operators."

Congressional Democrats are moving forward on a "doc fix", reports Jennifer Haberkorn: "During the reform debate, physician lobbies including the American Medical Association, wanted a full overhaul of the formula, called the sustainable growth rate, but agreed to back reform after Democrats said they would address it later. The proposal released Thursday as part of a broad jobs and tax bill would increase payments to doctors by almost $60 billion over three years to offset the planned cut. A final draft of the legislation was expected to be released later Thursday and the House was set to vote on it next week."

Health care reform threatens employer-based health insurance, writes John Goodman: "Take a hotel with maids, waitresses, busboys and custodians all earning $10 or $15 an hour. These employees can qualify for completely free Medicaid coverage or highly subsidized insurance in the exchange. So the ideal arrangement is for the hotel to fire the lower-paid employees—simply cutting their plans is not an option since federal law requires nondiscrimination in offering health benefits—and contract for their labor from firms that employ them but pay fines instead of providing health insurance. The hotel could then provide health insurance for all the remaining, higher-paid employees. Ultimately, we could see a complete restructuring of American industry, with firms dissolving and emerging based on government subsidies."

Word is that Harry Reid is likely to file cloture on financial regulation today, setting up a final vote as early as Wednesday. But no one is celebrating yet: There are still amendments left to be voted on, including a restoration of Glass-Steagall and the Volcker Rule. And what's going to happen in Conference Committee? Meanwhile, the opposition hasn't found its voice against Elena Kagan, but nor, it seems, have her supporters. The oil spill is still a disaster, but for the first time, we're making some headway against it.

The plan was for the financial-regulation reform bill to have a vote for cloture -- that is to say, a vote to end debate and move to a final vote -- at 2 p.m. today. But a handful Senate Democrats angry that their amendments haven't been considered derailed that. At 3:15 p.m., Democrats called an emergency caucus meeting. About 30 minutes after that meeting, Majority Leader Harry Reid called for a cloture vote.
He lost.